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12-16-08 Deposit Insurance (Published in A. Berger, P. Molyneux
and J. Wilson eds., The Oxford Handbook of Banking, Oxford University
Press, co-author with Robert Eisenbeis)
8-6-08 Bank Fragility : Perception and Historical Evidence
(Published in Towards a Framework for Financial Stability, D.
Mayes, R. Pringle and M. Taylor eds, Central Banking Publications)
11-20-07
When a Bank is not a Bank
1-28-04 Macroeconomic
Stability, Bank Soundness, and Designing Optimum Regulatory
Structures
By George G. Kaufman
Executive Summary This paper focuses on the strong links
between macroeconomic stability and bank soundness and argues
that if the first is not achieved the second is not likely either
with serious adverse consequences. Instability in banking is
most often the result of actions by governments directed at
the macroeconomy and banks to achieve short-run goals with little
consideration for unintended immediate or longer-term consequences.
Without government interference, there is little evidence that
the banking system is unstable. This paper develops a framework
for designing optimum regulatory structures that, if adopted
by countries, will help to reduce instability in their banking
systems and thereby also in their macroeconomies.
1-27-04 Minimizing
Post-Resolution Costs in Bank Failures
By George G. Kaufman and Steven Seelig
Executive Summary Significant bank failures have been
widespread in recent years, affecting almost every country with
a banking system. Bank failures may generate two costs to domestic
economies. One is a fiscal transfer cost from taxpayers to government
protected stakeholders and the other is a slowdown or actual
decline in aggregate real output that results in a loss in output
from a trend or capacity level. The costs of bank failure may
also be divided between credit losses from the shortfall in
the value of assets from the value of liabilities and liquidity
losses from the inability of depositors to access their accounts.
Particularly in the U.S., the recent focus of attention has
been on credit losses. But the fear of bank failures often centers
around the fear of frozen accounts. This paper analyzes the
importance of providing depositor liquidity at insolvent banks
in order to limit the costs of bank failures and makes recommendations
on how to provide such liquidity.
1-26-04 FDIC Losses in Bank
Failures: Has FDICIA made a difference?
By George G. Kaufman
Executive Summary The FDIC Improvement Act (FDICIA) was
enacted in 1991 in part "to resolve the problems of insured
depository institutions at least possible long-term cost to
the deposit insurance fund." This paper analyzes the losses
to the FDIC from resolving bank insolvencies before and after
FDICIA. It finds that, although the number of failed banks declined
sharply, losses as a percent of assets of failed banks increased
in the post-FDICIA period. Only if adjustments are made both
for large losses at a few larger outlier banks and for differences
in the size distribution of failures is the FDIC's loss rate
reduced to below its pre-FDICIA rate. The paper concludes that,
although the prompt corrective action provisions of FDICIA undoubtedly
reduced losses, bank regulators should focus additional attention
on detecting fraud and gross mismanagement at banks and on responding
to simple red flags of danger, such as unusually rapid growth
and too-good-to-be-true profitability, to reduce losses to the
FDIC further.
11-11-03 Reforming Financial
Markets for Structral Partnering
By George G. Kaufman
Executive Summary This paper reviews recent changes in
cross-border financial activity in North America and particularly
in the European Union, which is far more fragmented, to gauge
the contribution of the financial sector to macro-economic growth
and development. The paper finds increases in cross-border financial
flows in recent years. But the increases vary greatly among
countries and primarily reflect technological advances that
permit explicit and implicit barriers to cross-border flows
to be bypassed rather than the deliberate reduction or elimination
of these barriers. In particular, bank mergers in EU countries
appear to have been used more to grow domestic banks to repel
cross-border invaders rather than to invade cross-border. Cross-border
bank branching has also been limited to date. As a result, the
financial sector has not made the contribution to the EU and
particularly Euroland that it could.
11-10-03
A Proposal for Efficiently Resolving Out-of-the-Money Swap
Positions at Large Insolvent Banks
By George G. Kaufman
Executive Summary Recent evidence suggests that bank
regulators appear to be able to resolve insolvent large banks
efficiently without either protecting uninsured deposits through
invoking "too-big-to-fail" or causing serious harm to other
banks or financial markets. But resolving swap positions at
insolvent banks, particularly a bank's out-of-the-money positions,
has received less attention. The FDIC can now either repudiate
these contracts and treat the in-the-money counterparties as
at-risk general creditors or transfer the contracts to a solvent
bank. Both options have major drawbacks. Terminating contracts
abruptly may result in large-fire sale losses and ignite defaults
in other swap contracts. Transferring the contracts both is
costly to the FDIC and protects the counterparties, who would
otherwise be at-risk and monitor their banks. This paper proposes
a third option that keeps the benefits of both options but eliminates
the undesirable costs. It permits the contracts to be transferred,
thus avoiding the potential for fire-sale losses and adverse
spillover, but keeps the insolvent bank's in-the-money counterparties
at-risk, thus maintaining discipline on banks by large and sophisticated
creditors.
11-10-03 Basel II: The Roar
that Moused
By George G. Kaufman
Executive Summary The proposed Basel II bank capital
standards would change the in-place Basel I standards by attempting
to measure risk-based capital requirements more accurately and
adding two new pillars -- pillar 2 (supervisory review) and
pillar 3 (market discipline). This paper reiterates much of
the criticism of the pillar 1 capital requirements proposal
made by others and focuses on the two new pillars. It finds
that the proposal includes no recommendation for providing supervisors
with tools and authority to take prompt corrective action on
banks that require it and confuses market discipline with disclosure.
While the proposal specifies in great detail the pillar three
items that would be required to be disclosed, it fails to encourage
increases in at-risk claims, a prerequisite for effective market
discipline. Thus the paper finds it not surprising that Basel
II does not live up to its billing and that an increasing number
of national regulators are beginning to limit or reject implementation
in its current form.
8-27-03 Bank Procyclicality,
Credit Crunches, and Asymmetric Monetary
Policy Effects: A Unifying Model
By Robert R. Bliss and George G. Kaufman
Executive Summary This article shows that the simple
model of how monetary policy increases the assets held by the
banking system by injecting new reserves and lowering interest
rates may be incomplete. In practice, banks are subject to two
constraints - capital and reserve requirements. Where capital
requirements are binding, injection of reserves may not achieve
the intended increase in bank earning assets and may even lead
to a decrease. This helps to explain the possibility of a credit
crunch.
8-12-03 Netting, Financial
Contracts, and Banks: The Economic Implications
By William J. Bergman, Robert R. Bliss, Christian A.
Johnson and George G. Kaufman
Executive Summary Derivatives and certain other off-balance
sheet contracts enjoy special legal protection on insolvent
counterparties through a process referred to as "close-out netting."
This paper explores the legal status and economic implications
of this protection. While this protection benefits major derivatives
dealers and derivatives markets, it is less clear that other
market participants or markets in general are better or worse
off. While we are not able to conclude whether or not these
protections are socially optimal, we outline the wide range
of issues that a general consideration of the pros and cons
of netting protection should take into cognizance, and analyze
some of these issues critically. Ultimately the question becomes
one of quantifying complex trade-offs.
8-11-03 Depositor Liquidity and
Loss-Sharing in Bank Failure Resolutions
By George G. Kaufman
Executive Summary Bank failures are widely feared because
depositors may suffer losses in the value of their deposits
and restrictions in access to their deposits. In the U.S., this
is not true for insured deposits, which are made fully available
to depositors almost immediately. But both problems may occur
for uninsured deposits. One way to mitigate liquidity loss to
uninsured depositors is to make the estimated recovery value
of their deposits quickly available to them by the FDIC. Such
a policy would greatly enhance the FDIC's ability to resolve
large bank insolvencies without having to protect uninsured
depositors through too-big-to-fail policies.
1-10-03 Too Big to Fail
in U.S. Banking: Quo Vadis?
By George G. Kaufman
10-02-02 The Use of Economic Analysis
and Principles to Affect Public Economic Policy: The Case of
the Shadow Financial Regulatory Committee
By George G. Kaufman
8-26-02 The Value of Banking
Relationships During a Financial Crisis: Evidence from Failures
of Japanese Banks
By Elijah Brewer III, Hesna Genay, William Curt Hunter, and
George G. Kaufman
8-09-02 What have we Learned from
the Thrift and Banking Crises of the1980's?
By George G. Kaufman
7-12-02 International
Banking Regulation
By Maximilian J.B. Hall and George G. Kaufman
06-28-02 What is Systemic
Risk and Do Bank Regulators Retard or Contribute To It?
By George G. Kaufman and Kenneth E. Scott
11-29-00
Safety-net reform in the United States : What's done and what
remains
By George G. Kaufman and Peter J. Wallison
Executive Summary Federal legislation in recent years
has significantly changed the structure of the government-sponsored
safety-net under banks in the U.S. Perhaps the most important
change is requiring increases in insurance assessments whenever
FDIC losses from protecting insured deposits causes the FDIC
reserve ratio to decline below 1.25 percent and the FDIC suffers
any losses from protecting uninsured deposits because of too
big to fail. Thus, in effect, deposit insurance is privately
funded until all the banking system's resources are exhausted.
As a result, the government's implicit backup guaranty is greatly
reduced in importance. This paper argues that because of this
change, the banks should be given an increased voice in managing
the FDIC.
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George G. Kaufman 
